Health Savings Accounts| Use or Lose

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Is a Health Savings Account (HSA) right for you? Typically, at this time of year, we are reminding our patients about flexible spending accounts (FSA). HSAs are a similar way to create payroll tax savings.

Health savings accounts (HSA) are used for saving non-taxed earnings for future medical expenses. The HSA was created to help people control their healthcare costs.

Funds in an HSA can help you pay for medical bills until your plan’s deductible is met and your healthcare coverage begins.

Health Savings Accounts Tax Breaks

Health savings accounts offer a triple tax break.

  1. Contributions are not taxed,
  2. The interest earned is not taxed.
  3. Withdrawals for qualified medical expenses are not taxed, and any after-tax contributions you make to your HSA are tax deductible.

Qualified expenses include services provided by licensed health providers, diagnostic devices, prescriptions, substance-abuse treatment, acupuncture, and many others. You can find a list of eligible expenses by clicking here.

Who Qualifies?

Your employer may offer HSA options, or you can open an account on your own through a bank or other financial institution.

You must be under age 65 and carry a high deductible health insurance plan to qualify. For 2020, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. 

An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,900 for an individual or $13,800 for a family. (This limit doesn’t apply to out-of-network services.)

HSA Contribution Rules

Your contributions can roll over to the following year. An HSA if portable, which means if you change jobs, your HSA plan stays with you. The contribution amount to an HSA can be changed at any time during the plan year.

The maximum annual contribution you can make to your 2021 HSA is $3,600 for an individual, and $7,200 for a family. If you are age 55 and older (until you enroll in Medicare) you can contribute an additional “catch-up contribution” of $1,000.

Difference between HSA and Flexible Saving Account (FSA)

Unused funds in an FSA are forfeited at the year end and the elected contribution amount for an FSA is fixed and can only be changed at the beginning of the following tax year.

Investing your HSA funds

You can convert some of your HSA funds into an investment account that does not tax your earnings as they grow, and functions a lot like an IRA. 

Typically, your HSA administrator will charge a fee to allow you to invest a portion of your HSA funds and many HSA administrators require that you keep a minimum balance in your account before investing funds.

Be careful not to go below that threshold amount so you will be able to continue investing. Otherwise you will be required to wait until your funds reach the minimum balance before any additional investing. 

At age 65 you can use your HSA funds for any purpose without a penalty.

If you have questions, contact your employer.